Relationship between fiscal sustainability and efficiency: Evidence from large cities in Poland

Abstract

Fiscal sustainability should be defined in the relation between public finances and sustainable economy. It requires a fiscal policy aimed not only at a fiscal balance, but also at the well-being of future generations, while taking the economic, social, environmental and institutional dimensions into account. The objective of this paper is to examine the relationship between fiscal sustainability and efficiency on the example of large cities in Poland in the period from 2008 to 2019. In order to obtain empirical results, a data envelopment analysis and panel data analysis were applied, and a fiscal sustainability index was constructed by means of a multidimensional approach. Based on a sample of 66 large cities in Poland, the results showed that there is a negative relationship between fiscal sustainability and efficiency. These results, however, relate to a specific period in the history of Polish cities when the local debt limits were tightened. The improvement in efficiency allowed local government units to allocate saved local expenditures to the partial repayment of previously incurred local debts. By doing so, Polish cities fulfilled tightened fiscal rules, but their service-level solvency decreased.